Meet the Author

Murat Tasci |

Research Economist

Murat Tasci

Murat Tasci is a research economist in the Research Department of the Federal Reserve Bank of Cleveland. He is primarily interested in macroeconomics and labor economics. His current work focuses on business cycles and labor markets, labor market policies, and search frictions.

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Meet the Author

Beth Mowry |

Research Assistant

Beth Mowry

Beth Mowry was formerly a research assistant in the Research Department of the Federal Reserve Bank of Cleveland. Her work focuses on labor markets and business cycles.

06.05.09

Economic Trends

The Labor Market in this Downturn: A Historical Comparison

Beth Mowry and Murat Tasci

The National Bureau of Economic Research (NBER) declared December 2007 as the peak of the previous expansion in the U.S. economy (and thus, the start of the current recession). Assuming that we are still in the recession, this downturn will likely be the longest since 1945. The deterioration in labor market conditions in the current downturn has been particularly stark, according to either of the typically consulted measures (nonfarm payroll employment and unemployment). From the start of the recession to the end of May 2009, total nonfarm payroll employment declined by about 6 million, or 4.3 percent. In the same period, the unemployment rate jumped from 4.9 percent to 9.4 percent, amounting to almost 6.9 million additional unemployed workers.

Changes in the Unemployment Rate and Payroll Employment over the Business Cycle

Recessions
Unemployment rate increase
from recession start to peak
(percentage points)
Drop in employment
from recession start to trough
(percent)
1948-1949
4.1 (11)
5.0 (11)
1953-1954
3.5 (14)
3.4 (13)
1957-1958
3.4 (11)
4.2 (10)
1960-1961
1.9 (13)
2.3 (10)
1969-1970
2.6 (12)
1.2 (11)
1973-1975
4.2 (18)
1.9 (17)
1980
1.5 (6)
1.1 (6)
1981-1982
3.6 (16)
3.1 (17)
1990-1991
2.3 (23)
1.4 (10)
2001
2.0 (27)
2.0 (27)
2007-present
4.5 (17)
4.3 (17)

Note: Numbers in parentheses represent the total number of months from the beginning of the recession to the peak of the unemployment rate or the trough of unemployment. For the current recession it indicates the total number of months since the beginning of the recession.

In a typical business cycle, the unemployment rate starts to increase right around the beginning of the recession and does not show any sign of decline until the recession is over. The rate at which the unemployment rate increases over the course of the recession is a good measure of how severe a downturn is. In this regard, the current downturn resembles the 1973–1975 and 1981–1982 recessions. In those recessions, the unemployment rate peaked in the 18th and 16th months after the start of recession, respectively, and then started to decline. If anything, one might argue that the unemployment rate now looks likely to continue to rise for several more quarters and peak well after the end of the recession. The course of the unemployment rate during the previous two recessions (1990–1991 and 2001) might provide some insight about this: In both recessions, unemployment did not increase by large numbers, but the gradual increase was over a very long period (23 and 27 months, respectively).

A similar picture emerges from the pattern of employment decline over the past 17 months. The magnitude of the decline seems to be very much in line with the 1981–1982 recession, but it is probably far from over. In terms of job loss, the current downturn is the worst recession since the 1948–1949 recession, 4.3 percent relative to 5 percent. The most prolonged recovery in the labor market in the postwar period was observed after the 2001 recession. It took nine quarters for the decline in employment to stabilize.

The so-called “jobless recovery” following the last complete recession puzzled many economists, because the declines in productivity and real GDP in that recession were quite modest. In fact, the actual decline from peak to trough in real GDP was less than 0.2 percent. By that measure it was the mildest-ever U.S. recession. However, in general, there is quite a robust positive correlation between the magnitude of the decline in real GDP and payroll employment in recessions. The current recession fits the typical pattern less closely to some extent. The most recent data for the first quarter of the year indicates that real GDP has declined 2.34 percent overall since the peak in the third quarter of 2007 (making the current recession the fifth-worst to date). The associated quarterly employment decline of 4.11 percent roughly fits the general pattern.

The correlation between output loss and the unemployment rate in recessions is even stronger. The overall output decline of 2.34 percent so far in this recession is now associated with an increase of 4.23 percentage points in the unemployment rate (measured quarterly). The jobless recovery after the 2001 recession also featured a significant increase in the unemployment rate relative to the decline in output. Even though the unemployment rate increased barely 2 percentage points in that recession, the prerecession level of unemployment was 4.2 percent, which indicates an increase of almost 50 percent.

Analyzing different recession episodes in the postwar period points to some general patterns and some major outliers. First of all, large jumps in the unemployment rate and large drops in employment have been associated with significant losses in output. Secondly, the labor market’s adjustment usually extends beyond the end of the recession. The recoveries after the last two downturns, especially the 2001 recession, were very long. If this pattern persists in the current downturn, the already severe losses of employment and increases in the unemployment rate might make a prolonged recovery even more painful for the labor market.